The Strategist

Why is the EU's economic growth retarding?

08/01/2016 - 14:36

Restoration of the Eurozone economy was short-lived. In the II quarter, the growth slowed twice to 0.3%, compared with the first half. In annual terms, the Eurozone’s GDP increased by 1.6% after 1.7%, Eurostat said.

There were no changes in the GDP of some of the block’s second largest economics - France (0.7% in I quarter) and Austria (0.6%). Spain, the fastest growing economy in the region, also slowed down to 0.6%.

The euro area’s pace of growth in the I quarter pointed to the fact that the Eurozone’s GDP went back to pre-crisis level (I quarter of 2008). The growth was mainly triggered by decline in energy prices. However, further recovery of oil prices deprived the Eurozone of growth drivers, writes the WSJ.

Most of all, the performance data has been messed up in France, say analysts at Morgan Stanley. National Statistical Institute of France (Insee) was waiting for GDP growth of 0.3%, yet the real statistics showed up very disappointing. Investment in the construction sector and manufacturing decreased; household spending remained on the spot. Euro 2016 was supposed to encourage the latter, and ticket purchase in I quarter increased them by 1.2%. However then, the French economy has faced a double blow - a wave of strikes and the effects of the terrorist attacks in 2015 and 2016. The long strike led to a shortage of fuel and serious disruptions in the transport system. The attacks, in turn, resulted in relatively small number of tourists during the peak tourist season (almost 600 000 people, Eurostat). Spending on restaurants and hotels have been reduced the most, indicates Insee. 

Accorhotels SA Hotel chain warned that terrorist attacks brought a decrease in net profit by 23%. "Now, when choosing between New York and Paris, people prefer New York, because that's where they feel safer", - says Accorhotels SA’s Chief Financial Officer Jean-Jacques Morin (quoted by WSJ). "We are growing throughout the euro area, except for France, which suffered from strikes and acts of terrorism", - said Executive Director of retailer Carrefour CA Georges Plassat.

Eurozone enters the path of moderate growth rates, writes the FT. "GDP growth will be slowing down for the rest of the year" - comments Jack Allen from Capital Economics (quoted by WSJ). The III quarter will also be affected by results of the UK referendum. Clemente de Lucia, BNP Paribas economist, estimated that Brexit will cost of the Eurozone’s 0.5% GDP next year.

Aside from Brexit and the unabated terrorist threat, finances of the Eurozone are being influenced by the precarious position of local banks.

A stress test, conducted a few days ago by the European banking authority, confirmed poor condition of many credit institutions in Europe. Italian banks and the German Deutsche Bank have it worst of all. In recent months, Deutsche Bank’s shares have lost 25%; the French bank Société Générale’s - 23%, and the Italian giant UniCredit - almost 30%. Head of Societe Generale’s supervisory board Lorenzo Bini Smaghi says that the entire financial system of the euro area is being under strong pressure.

The European banking sector have been accumulating problems for a long time. However, the Brexit referendum sowed panic among foreign investors and undermined confidence in the financial markets. Having these conditions in mind, investors are afraid to invest money in all countries with weak economies, including Italy. 

Italian banking sector has about 360 billion euros of "bad" securities, which is about 20% of the total loan portfolio. At the same time about 200 billion euros are "irretrievably bad." Shares of Italian banks has fallen since the beginning of the year by more than half, and this further aggravates the situation.

Collapse of one bank may lead to a chain reaction that would have catastrophic financial and political consequences, not only for Italy but also all over Europe. According to the Bank for International Settlements (BIS), the Italian banks are holding about 550 billion euros of loans from around the world, including 250 billion euros from the French banks and 90 – from German. Only Deutsche Bank’s losses from the collapse of Italy would have been 30 times bigger than in the case of bankruptcy of Greece.